Earlier this year, we wrote about the crafting industry’s post-pandemic hangover, a soft spot that JOANN's management expected to recover from later in 2022. Unfortunately, neither JOANN, nor the industry has. Traffic has been down, and the chain is lagging its peers Michaels and Hobby Lobby (below).
- In our previous analysis, we shared that JOANN’s business was different than Michaels and Hobby Lobby, as the chain's sales per location were roughly half of its competitors. In addition, JOANN offers a higher service level at $15 per transaction, compared to $12.50 for Michaels. Lower sales densities and higher service intensities render lower unit economics; as such, the chain faces greater vulnerability to an economic downturn.
- JOANN’s merchandise mix as a percentage of revenue is 43% sewing, making it the market leader in that category (as shown in the chart below). In addition, 25% of JOANN’s customers sell their crafting on Etsy, Folksy, eBay, and other marketplaces. We’ve been writing about the "e-commerce reckoning" all year long. And so, it seems quite likely that that reckoning has impacted the commercial crafter customers of JOANN, Michaels, and Hobby Lobby as well. As such, these professional crafters have likely curtailed their buying of materials at the craft stores; that would explain the traffic declines that we show above, as well as JOANN’s weak business results.
- JOANN’s comparable-store sales declined -8.0% for its August-October 2022 quarter. As shown in the table below, the 3-year CAGR is little changed, as was the trend pre-pandemic. (Prior to the pandemic, the industry showed almost zero growth and Hobby Lobby expanded into a lot of new locations, taking market share.) CEO Wade Miquelon shared that the chain witnessed a slowdown mid-quarter and "fewer items per basket as opposed to a downturn in customer traffic trends overall. Further, this reduction in items per basket was skewed to both our lower-end database customers and our customers not in our database…The fall seasonal decor and floral categories underperformed, as customers seem much less inclined to indulge and decorate versus the prior year. Additionally, consistent with broader industry trends in this category, we experienced a meaningful slowdown in our craft technology business." In other words, their less affluent customers are also curtailing spending–-something that we have seen across retail.
- With its comp sales decline, trailing-twelve-month (TTM) sales per square foot declined $5 to $134 QoQ. Given the soft state of the economy and the "E-Commerce Reckoning", the TTM figure is likely to drift lower over the next year. Given management’s dour outlook on the economy and its customer, they announced a $200M expense reduction program, which is significant compared to $221M EBITDA level in 2019. It’s also pressing given its current TTM free cash flow burn of -$170M. It will take them 18 months to achieve those expense savings.
- TTM EBITDA moved lower to $10M. Its quarter-end balance sheet figures included cash of $28M, inventory of $747M, long-term debt of $1.1B, and lease liabilities of $736M. Interest expense is running at approximately $80M per year. Consequently, it’s critical for the company to quickly improve its profitability. Given these dynamics, the Board decided to pause dividend payments. Charged with strengthening the company’s liquidity is incoming CFO Scott Sekella, who comes from Under Armour where he was VP of Corporate FP&A.
- Key to its customer proposition, only $40M of the $200M in savings is to come from overhead and not store service. As Miquelon stated, "We are not going to do anything on our store labor front that's going to compromise where we are right now, which is kind of actually in some of the rarefied air for that customer service metric. It doesn't mean there might be some opportunity there. But that's something that we're going to protect at all costs."
- Capex and store remodeling are likely to be lower in 2023 than the prior plan.
- We’d expect Michaels to have similar business and liquidity stress as JOANN. Given that Hobby Lobby isn’t likely levered up like these two and its better traffic performance, we'd suspect that its financials are materially better. Moreover, we wouldn’t be surprised to see them view their stressed near competitors as vulnerable, and as a result, for Hobby Lobby to pursue extra market share capture during 2023, either from encroaching upon their trade areas with new Hobby Lobby locations, or from sharper prices and more coupons. 2023 is going to be a "dynamic year" for the crafting retail industry.